Ch2 - Introduction to Financail Statements

Question 1

Accounting equation, also called balance sheet equation is:

Answer 1

Assets - Liabilities = Equity (net worth or also net assets)
or
Assets = Liabilities + Equity

Question 2

What are assets?

Answer 2

Assets are what the entity owns. Assets are the resources controlled by the company (as a result of past events) from which future economic benefits are expected to flow to the company.

Question 3

List main categories of assets.

Answer 3

1. Intangible assets (non-current assets)
2. Tangible assets (non-current assets)
3. Financial assets, including accounts receivables and cash (current and non-current assets)
4. Inventories (current assets)

Question 4

List three key elements of the income statement.

Answer 4

1. Revenues
2. Expenses
3. Net income

Question 5

What can retained earnings be used for?

Answer 5

1. Distribution to the owners.
2. Offsetting a loss.
3. Increasing share capital.

Question 6

Three major types of analyses of financial statements are:

Answer 6

1. Trend analysis
2. Ratio analysis
3. Common-size analysis

Question 7

Why profit (net income) at the end of period is not equal to cash at the end of period?

Answer 7

Profit (net income) is different from cash due to the accrual rules of recognition that separate the recognition of a transaction from its settlement in cash.